Abstract

This essay uses recent methodology for estimating capital shortfalls of financial institutions during aggregate stress to assess the evolution of financial sector health since 2007 in the United States, Europe and Asia. Financial sector capital shortfalls reach a peak in the end of 2008 and early 2009 for United States and Europe; however, they decline thereafter steadily only for the United States, with Europe reaching a similar peak in the Fall of 2011 during the southern periphery sovereign crises. In contrast, the financial sector in Asia had little capital shortfall in 2008-09 but the shortfall has increased steadily since then, notably for China and Japan. These relative patterns can be explained based on adequate regulatory responses in the United States, the lack thereof in Europe, economic stagnation in Japan, and the bank-leverage based fiscal stimulus in China.